Investigators charged that Israel and Marino embarked on a scheme to defraud by fabricating financial, account and performance summaries for the Bayou funds soon after their inception. Israel and Marino overstated the funds’ 2003 performance, claiming a $43 million profit in the four hedge funds, while trading records show that the funds actually lost $49 million, the SEC charged; they concealed losses by creating a fictitious accounting firm in 1999 to issue independent audits. Israel and Marino each pleaded guilty to one count of criminal conspiracy, investment advisor fraud and mail fraud in federal court. Marino also pleaded guilty to one count of wire fraud.

KL Group
Starting in 1999, principals Won Sok Lee, John Kim and Yung Bae Kim defrauded investors of about $81 million through the KL hedge funds they managed and Shoreland Trading, a registered broker-dealer they controlled in Irvine, Calif., according to the SEC.

The partners boasted of annualized returns of 125 to 150 percent, according to the SEC complaint, which charges that the hedge funds were actually posting tremendous losses. Today only one-eighth of the original capital remains.

Two of the three principals fled the country. The SEC and the receiver representing investors deposed the third, John Kim, in June. Kim refused to answer almost all questions, invoking his right against self-incrimination.

Global Money Management
In 2004, the SEC filed suit charging Marvin I. Friedman, head of San Diego hedge fund Global Money Management and LF Global Investments, the fund’s advisor, with securities fraud. The firms had been overstating the hedge fund’s assets since 1993. Friedman told investors that they ranged between $60 million and more than $100 million, according to the SEC. However, as of December 2002, the fund had been worth no more than $11 million. Friedman also failed to tell investors of his regulatory run-ins, including that he had been barred from association with any member of the NASD, the SEC stated.

International Management Associates
Launched in 1997, this Atlanta fund raised as much as $185 million. In February, the SEC filed a complaint alleging that principal Kirk S. Wright, along with two advisory firms, provided investors with false quarterly statements on hedge fund performance and assets, and the fund’s assets were largely eradicated by 2005. Wright told investors that year that the fund held more than $155 million in securities, but three of the accounts did not exist and the fourth was unconnected with International Management, the SEC charged. When the allegations surfaced, Wright disappeared, but in June the FBI apprehended him at a hotel in Miami.

Wood River Capital Management
In October 2005, the SEC filed an emergency enforcement action against John H. Whittier and the Wood River funds he managed, alleging the funds defrauded investors by falsely promising sound financial management and high performance. Investors believed Wood River funds would be broadly diversified and overseen by an auditor, but neither was the case, according to the SEC. No audits were conducted, and one small-cap stock, EndWave, grew to account for more than 65 percent of the $265 million in assets the fund claimed by July 2005. Wood River did not disclose this concentrated position until the SEC forced it to do so.

Illustration by C. J. Burton.

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